 Income tax 2022-2023. Social security benefits. Let's do some wealth preservation with some tax preparation. Most of this information comes from the Form 1040 Instructions tax year 2022. The line instructions you can find on the IRS website, irs.gov, irs.gov. Looking at the income tax formula we're focused in once again line one, that being income. Remembering that the first half of the income tax formula is in essence an income statement, although a strange one where we have income up top, the equivalent of the expenses being the deductions getting us down to the equivalent of net income, that being here. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category, further broken out by course. Each course then organized in a logical reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Taxable income. Our goal being the opposite of normal goals because it's taxes, that being to have the taxable income as low as possible. Therefore when looking at line one we want to determine is something income, if it is income, is it something that we have to include as taxable income. Now we're talking about the social security benefits at this point in time. Quick recap on a couple things on the social security benefit program. Obviously there's two sides that we usually think about, one being our working years where the social security taxes are bad because we have to pay them into the system and that's going to be the social security. We usually kind of clump them together with social security and Medicare type of payments that we're paying, they're coming out of our W2s, wages, or and or they're coming out of our social security self employment taxes that we might pay if we have a sole proprietor type of business. And then in retirement years we might get distributions from the plan, that's what we're talking about now because now money is coming in. There's all this new money coming in and it's not in and we're thinking is it something that we have to include in income. Now just notice that social security is a little bit strange because you might think, hey look I already kind of earned the income and then I paid it in to the social security program and now I'm getting it back. So let's just do a quick kind of recap on the structure or how social security came about and then we'll get into the taxation applied to it and it might make a little bit more sense. You might be able to kind of get a story which will help you to memorize the way the taxation is going to work. So when social security was put in place it was it happened like in the 1930s in the Great Depression when a lot of these laws came into play and a lot of people I think when it first came into play thought of it more as kind of a welfare program meaning we're going to be helping the people that are not able to pay for their own retirement possibly because they lived past their life expectancy or they had some type of tragedy happened and therefore when you're paying into that kind of program their general thought process is I don't expect to be benefiting from this program I expect it to be just benefiting the people that need this program it's a welfare type of program kind of system however then it seems to have morphed over time so that the taxes have gone up and up and it's now kind of thought of they're kind of advertising it from the government standpoint as though it's like a government retirement plan employment and a 401k retirement plan which would then think that everybody no matter how much income you have would get benefits from it which is kind of the system that is going to be set up meaning we're putting money in and the more money you put in if it was just a normal kind of retirement plan you would think the more benefits you should get in the payout when they pay out the benefits so now we've got this kind of mix between those two objectives so the more money you put into the system during your working years which means you're going to put more in if your income is higher because you're going to have a higher tax that you're going to be paying as your income goes up then your benefits will go up in general the calculation of your benefits will take into consideration that you paid more in however it also has some welfare components meaning that the more income you put in on the higher side of things the less added benefit that you're going to get from those payments and so that's how kind of the benefit payments kind of are calculated in general and then when you get the payments they can also kind of put in play this mix between the payments being a welfare program versus a retirement program and basically saying if your income is below a certain threshold then you may not be taxed you might have an exemption of the taxation of these payments but if your income is higher then they're going to tax more of the income that you got from the social security up to 85% I believe that's the general rule okay so we're going to be focused in on the social security which is down here on line 6 of page 1 of the form 1040 if you look at the actual tax software then it'll give you this kind of worksheet to determine how much of the social security is taxable the general question that will come up is if I get social security how much of it is going to be taxable how much do I have to include as taxable income and the general rule is going to be well if you have a substantial amount of taxable income in your retirement years it's going to be up to 85% that's what you want to kind of keep in your mind as the general rule you're going to be paying like up to 85% of the social security so and remember when you're talking about social security payments you're usually talking about people that are in of course their retirement years and they're getting the social security payment so you would expect then they wouldn't have a lot of W-2 income at that point in time you would expect they're not at their peak working years in terms of earning years so you might deal with taxpayers at that point in time where the social security is like their main form of income or they might have other things that they're depending on to live on that aren't taxable which means you're talking about people that might have a lower taxable amount or you might be talking to more well-off individuals who may not have W-2 income at that point but they still have a substantial amount of income coming from an out of like IRAs 1099 Rs and from investments in the form of dividends and interest and in that case you would expect they would be beating tax at the max of their social security benefits 85% included in income that's not the rate that's how much you'd have to include in income to then be subject to the tax rates in the progressive tax system ordinary tax rates okay so you will pay tax on only 85% of your social security benefits based on the Internal Revenue Service IRS rules if you this is from the Social Security website by the way instead of the IRS website I'll file a federal tax return as an individual or your combined income is between 25,000 and 34,000 you may have to pay income tax on up to 50% of your benefits more than 34,000 up to 85% of your benefits may be taxable so generally if your income is a little bit lower then you might be paying up to 50% but if your income is significant still a fairly low bar then you're going to be paying up to 85% included in income file a joint return and you and your spouse have a combined income that is now we're talking about a married filing joint between 32,000 and 44,000 you may have to pay income tax on up to 50% of your benefits more than 44,000 up to 85% of your benefits may be taxable if your married filing separate returns you probably pay taxes remember that married filing separate the government is often skeptical of that filing position people taking it possibly in order to try to take advantage of some of these income threshold rules so they often adjust it in an unfavorable way for those filing, married filing separate so be aware okay so line 6A, 6B and 6C line 6A, 6B social security benefits you should receive a form SSA 1099 so that's the type of form that you're going to be receiving it's a 1099 type form which is an indication of saying oh this might be income that I have to be reporting just like other types of 1099s showing in box 3 the total social security benefits paid to you box 4 will show the amount of any benefits you repaid in 2022 if you receive railroad retirement benefits treated as social security you should receive a form RRB 1099 use the social security benefits worksheet in these instructions to see if any of your benefits are taxable so exception do not use the social security benefit worksheet in these instructions if any of the following applies you made contributions to a traditional IRA for 2022 and you or your spouse were covered by a retirement plan at work or through a self employment instead use the worksheet on publication 590A to see if any of your social security benefits are taxable and to figure your IRA deduction now again you can go through the social security worksheet of course and go through a more formal type of calculation but obviously in practice software is quite useful for doing that to put together that worksheet so in practice the general idea would be someone's asking you a question is it taxable? you're probably going to have to include up to like 85% as income unless your income is relatively low in which case you might have to include something up to like 50% and you probably don't want to get into the weeds talking to someone in too much detail on how the tax calculation works and you're probably in practice going to be depending more on the software to do the nitty gritty in terms of the tax calculation so your goal obviously communication with clients and yourself understanding you could get into the nitty gritty of the calculations to better understand it but that's probably not what a client's going to want to hear and the software is going to help you to do that so you repaid any benefits in 2022 and your total repayments box 4 were more than your total benefits for 2022 box 3 none of your benefits are taxable for 2022 also if your total repayments in 2022 exceed your total benefits received in 2022 by more than 3000 you may be able to take an itemized deduction or a credit for part of the excess payments if they were benefits you included in income in an earlier year for more details you included in your application you file form 255 4563 or 885 or you exclude employer provided adoption benefits or income from sources with Puerto Rico instead use the worksheet in publication 915 Social Security Information Social Security Benefits can now get a variety of information from the SSA community administration website with a My Social Security account so notice that the government is trying to get better with this information on their website clickers website the kind of rationale with the IRS and some other government entities was that the websites aren't secure or whatnot so we don't want to do the login and that kind of stuff but obviously they've been showing up so badly by other financial institutions that deal with similar kind of security issues with regards to personal information like financials, institutions and banks that they have to update and add this ability to log into accounts so you would think that we would be logging into these types of accounts like our Social Security and our our internal revenue service and whatnot and being able to get information there instead of relying completely on like snail mail still these days and so they are starting to update all that kind of stuff so including a replacement form SSA 1099 if needed for more information and to set up an account go to the ssa.gov my account now notice that some people start to think that the all government entities are kind of like the same as though they talk to each other all the time or something and obviously they might share information but the IRS doesn't really know exactly what's going on with your state tax situation you know just because they're two government entities and obviously the Social Security information in terms of identified who you are is what is used by the IRS but you need to know which place to go to when you're talking about a particular thing when you're talking about the taxes based on the 1099 that you got from the government from the SSA you're going to report that to the IRS but if you have questions about of course the amount of benefits you're receiving and that kind of stuff then you're going to have to go to the Social Security information in that website so disability payments in other words all these entities are like talking to a different bureaucracy in their own little silo that's all they know so you've got to go to the right silo or you're going to get nowhere and in the other silo and they love to be able to say that's outside my jurisdiction I don't know what you're talking about with that that's how it works so disability payments don't include in your income any disability payments including Social Security Disability Insurance SSDI payments you receive for entries incurred as a direct result of a terrorist attack directed against the United States or its allies whether outside or within the United States now obviously again this comes into this play where when we have some things that are considered welfare programs you would think that you know the money that you get wouldn't really be taxable in those cases and whatnot and so this is where this funny kind of interplay comes between like a welfare state type of thing where the big government is getting to the point where they want everybody's retirement plan to be through the government or something like Social Security is everybody's retirement plan somehow versus a reduction of some of those benefits and whatnot so that it's actually a welfare program designed to help people with a safety net kind of situation and again that's the interplay that's just a kind of interesting interplay that's playing out in our thought process of these rules at this time so in the case of September 11th attacks injuries eligible for coverage by the September 11th Victim Compensation Fund are treated as incurred as a direct result of the attack so if the payments are incorrectly reported as taxable on form SSA 1099 don't include the non-taxable portion of income on your tax return you gotta finish these tax returns you may receive a notice from the IRS regarding the omitted payments follow the instructions in the notice to explain that the excluded payments aren't taxable for more information about these payments you can see Publication 3920 example Taxpayer X a firefighter was it was disabled as a direct result of the September 11th terrorist attack on the World Trade Center X began receiving Social Security Disability Insurance SSDI benefits at age 54 X's full retirement age for Social Security retirement benefits is age 66 X's birthday is April 25th in the year X turned 66 X received $1,500 per month in benefits from the Social Security Administration for a total of $18,000 because X became eligible for a full retirement benefit in May the month after X turned 66 X can exclude only four months January through April of their annual benefits from their income $6,000 X must report the remaining $12,000 online 6a X must also complete the Social Security Benefits Worksheet to find out if any part of the $12,000 is taxable Tip form rrb 1099 if you need a replacement form rrb 1099 call the Railroad Retirement Board there's a number here and you can go to the website as well a crude leave payment if you retire on disability any lump sum payment you receive for a crude annual leave is a salary payment so the payment is not a disability payment include it in your income in the tax year you receive it line 6c check the box on line 6c if you elect to use the lump sum election method for your benefits if any of your benefits are taxable for 2022 and they include a lump sum payment that was for an earlier year you may be able to reduce the taxable amount with the lump sum election you can see lump sum election in publication 915 for details so the general takeaway is obviously when we put the money into the Social Security program it's coming out of our W2s and what not and that's usually taken care of by the employer or we have to do the self employment tax if we're a sole provider or something like that and that's going into the Social Security program when we get the money out of the Social Security program then the question is does it have to be included in income generally up to like 85% is likely to be included in there unless your income is below a fairly low threshold in which case up to 50% might be included in income and therefore the tax rate might be applied to that income we'll take a look at some examples of this in a following presentation